Does broad money matter for interest rate policy?
AbstractThis paper presents a business cycle model with financial intermediation encompassing the conventional New Keynesian model. Households’ financial wealth comprises cash and interest bearing deposits. When deposits provide transaction services, real broad money, which is predetermined, affects aggregate demand and has a stabilizing impact. Monetary policy can ensure equilibrium uniqueness if the central bank reacts at least slightly on the real broad money gap. Moreover, if the central bank aims at minimizing a standard loss function, real broad money enters the interest rate reaction function. Thus, money matters if it is defined broadly enough to include all households’ financial assets. --
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Bibliographic InfoPaper provided by ZEI - Center for European Integration Studies, University of Bonn in its series ZEI Working Papers with number B 15-2002.
Date of creation: 2002
Date of revision:
Interest rate policy; real broad money; financial wealth; macroeconomic stability;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
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- Hafer, R.W. & Jones, Garett, 2008. "Dynamic IS curves with and without money: An international comparison," Journal of International Money and Finance, Elsevier, vol. 27(4), pages 609-616, June.
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